A 504 loan from the U.S. Small Business Administration (SBA) may be helpful for companies that need to make a sizable acquisition to grow their operations or create jobs. This loans provide inexpensive financing for big-ticket items like real estate or equipment. 504 loans are a great choice for small-business owners because they have maturities as long as 25 years and can provide financing of up to $5.5 million. How the SBA 504 loan program operates, who is eligible, and how to apply are explained here.
What is SBA 504 Loan ?
The SBA 504 loan program, also referred to as the CDC/504 loan program, offers long-term, fixed rate financing for substantial fixed assets that support business expansion and job development. Loans are available through the SBA 504 loan program to assist with paying for fixed assets or real estate. These loans are available to qualified business owners with good credit ratings and provide low interest rates, minimal down payments, and favorable terms.
Certified Development Company (CDCs), the SBA's community-based partners who oversee nonprofit organizations and foster economic development in their areas, offer 504 loans. The SBA certifies and oversees CDCs. A 504 loan can be for a maximum of $5 million. The borrower may be eligible for a 504 loan for up to three projects totaling a maximum of $16.5 million for specific energy projects worth up to $5.5 million each.
Key Facts of 504 Loan
- A SBA 504 loan is a type of funding the agency provides to support business expansion and job creation through the improvement or purchase of real estate, machinery, and other fixed assets.
- Banks and credit unions that have received SBA approval as well as CDCs can issue, fund, and administer SBA 504 loans.
- Potential borrowers select a CDC based on where they live, and they can then prequalify to find out how much money they qualify for.
- Funds can be used by borrowers to upgrade or update already-existing buildings, real estate, streets, utilities, parking lots, and landscaping.
- The utilization of loan funds for working capital, inventory, debt refinancing, or rental real estate investments is not permitted.
How the 504 Loan Works ?
The 504 Loan or Certified Development Company program of the U.S. Small Business Administration (SBA) is intended to offer finance for the purchase of fixed assets, which often refer to real estate, buildings, and equipment, at prices below those of the market. The program works by distributing the loan among three parties. A conventional lender (usually a bank) contributes 50%, the business owner a minimum of 10%, and a so-called Certified Development Company (CDC) contributes the remaining 40%.
Large business expenditures like real estate or equipment can be financed over a long period of time (up to 25 years) with the help of SBA 504 loans. Although most loans have a $5 million ceiling, some projects may be eligible for up to $5.5 million. A 504 loan can only be obtained via CDCs, which are the SBA's community-based partners. A 504 loan is long-term, fixed-rate financing that can be used to pay for the acquisition of large fixed assets like buildings, land, machinery, or equipment. Working capital, inventory, debt consolidation, payback, refinancing, rental real estate investment, or speculation are all prohibited from using the funds.
Who is Eligible for SBA 504 Loan ?
To qualify for an SBA 504 Loan, your business must meet the following criteria:
- Business Type: Must operate for profit and be located in the U.S.
- Net Worth: Less than $15 million.
- Net Income: Average net income below $5 million after taxes for the previous two years.
- Management Experience: Proven management and operational experience.
- Job Creation or Public Policy Goals: The business should create jobs or meet specific community development goals.
The SBA size guidelines, possessing competent management competence, a workable business plan, excellent moral character, and the ability to repay the loan are other basic eligibility requirements.
Businesses engaged in passive, speculative, or nonprofit activity are not eligible for 504 loans. Small businesses and lenders are urged to get in touch with a Certified Development Company in their region for more details on eligibility conditions and loan application procedures.
How to Use a 504 Loan ?
A 504 loan may be used to finance a variety of items that support business expansion and employment creation. These include the construction or purchase of:
- New facilities
- Existing land or buildings
- Equipment and machines for the long term
As well as the modernization or improvement of :
- Existing infrastructure
- Streets, utilities, parking lots, land, and landscaping
A SBA 504 loan cannot be used for:
- Inventory or working capital
- Refinancing debt, consolidation, or repaying
- Investment or speculation in rental real estate
How to Apply for a SBA 504 Loan ?
You must find a Certified Development Company (CDC) in order to get an SBA 504 loan. Then start to assemble and prepare your loan authorization package, using 504 Authorization File Library to gathering the documents you'll need to submit an SBA 504 loan application.
Here are the steps to apply for 504 loan :
1) Find a certified development company (CDC) :
CDCs are nonprofit organizations that work with the SBA to provide financing to small businesses. 504 loans are available exclusively through CDCs, borrowers must work directly with a CDC. You can find a CDC in your area to ensure you are dealing with a qualified lender.
2) Complete the application :
Your CDC will provide you with an application form that you will need to complete. The application will require information about your business, such as your financial statements, tax returns, and business plan.
3) Obtain a loan from a third-party lender :
The SBA 504 loan program requires that you obtain a loan from a third-party lender for 50% of the total project cost. The CDC will provide the remaining 40% of the project cost and you will need to provide a down payment of at least 10%.
4) Wait for approval :
The CDC will review your application and determine if you are eligible for an SBA 504 loan. The SBA will then review and approve the loan.
5) Close the loan :
Once the loan is approved, you will need to close the loan with the CDC and the third-party lender. The funds will be disbursed to the vendor or seller of the equipment or property.
If your application is approved, SBA 504 loans typically take one to two months to close. But closing can take longer for larger and more complex purchases.
Keep in mind that the application process for an SBA 504 loan can be lengthy, so it is important to start the process early and work closely with your CDC to ensure a successful application.
What do I Need to Apply for 504 Loan ?
You'll require the following documents to apply for an SBA 504 loan once you've found a CDC :
- Business plan.
- The last three years business and individual tax returns.
- Both business and individual financial statements.
- Accounts receivable and payable.
- Cost documentation.
- Contractors' projections.
This is not a comprehensive list, and the CDC and bank you work with might need more paperwork to process your 504 loan application.
How to Repay 504 Loan ?
Terms for loan repayment vary depending on a number of factors, such as :
Repayment terms :
Available maturity terms are 10 and 20 years.
- 10 years for equipment.
- 20-25 years for real estate.
Interest rates :
- Fixed and tied to U.S. Treasury bond rates.
- Pegged to an increment above the rate of current market for five and ten years US Treasury issues.
- Totals around 3 % of the debt, rate may be financed with the loan.
Down payment :
- Typically 10% from the borrower, with the CDC and lender covering 40% and 50%, respectively.
Fees :
- Fees include CDC, SBA, and credit union or bank fees, which are vary. These fees are baked into the loan amount, so a owner’s only upfront cost is the 10% down payment.
Current borrowers :
- Please contact with the SBA loan servicing center that is indicated on your account statement if you need assistance with your SBA account balance, the due date, or any other inquiries about the specifics of your SBA loan.
Frequently Asked Questions
What is the difference between SBA 7(a) and 504 loan?
Working capital, the acquisition of supplies or equipment, as well as the revolving of business debt are just a few of the many expenses that SBA 7(a) loans can be utilized for. On the other side, SBA 504 loans are intended for sizable equipment or facility purchases or upgrades. Working capital and inventory cannot be used as collateral for SBA 504 loans.
An SBA 504 loan is supported by three sources, a Certified Development Company (40%) a bank or credit union (50%) and the small-business owner applying for the loan (10%). This is in contrast to SBA 7(a) loans, which are funded by a bank or credit union. Business owners may need to put down as much as 20% in some situations.
How long does it take to get an 504 loan?
From the time you apply for an SBA 504 loan until your loan is funded, it normally takes several months. For more complicated ventures, like real estate purchases, that period may extend as far as six months.
What can an 504 loan be used for?
According to the SBA, fixed assets that "support business growth and employment creation" can be purchased with a 504 loan. These resources could be a brand-new structure, piece of machinery, or equipment. A 504 loan may also be used to construct or improve infrastructure, such as parking lots, streets, and utilities. A 504 loan cannot be used as working capital, to buy inventory, to pay off or refinance debt, or to invest in rental real estate, in contrast to more broad business term loans.
What is the maximum SBA 504 loan amount?
504 loans often have a $5 million maximum. Some eligible manufacturing or energy-efficient projects may be eligible for several 504 loans, each of up to $5.5 million.
Can you have two 504 loans?
Yes, many small business borrowers may be unsure if they may obtain multiple SBA 504 loans.
How an SBA 504 loan is structured?
The 504 loan structure is composed of a 40% SBA 504 note, a 50% lenders note, and a 10% borrower contribution.
What are SBA 504 fees?
Closing costs, such as but not limited to credit reports, title work, recording fees, and search fees, are the responsibility of the borrower. Upon loan approval, Growth Corp will charge the borrower 1% of the 504 loan amount to pay these fees, with a minimum charge of $2,500, and will reimburse any remaining amounts at funding.
Do you need collateral for SBA 504 loan?
A 504 loan requires no collateral other than the property being acquired, however traditional lenders (banks or finance companies) may require additional collateral, such as your primary residence, to secure the loan.
Can you pay off a 504 loan early?
The length of the prepayment penalty depends on the term of the 504 loan if you decide to pay it off early. 504 loans are typically 20-year loans with a 10-year prepayment penalty. The debenture rate imposed on your loan determines how much of a penalty you will receive.
What are the benefits of a SBA 504 loan?
- A 10% down payment on a loan can support up to 90% of the borrower's project.
- Long and flexible repayment terms are available.
- The maximum amount of fees is 2.65% of the loan's value.
- Over the entire loan term, interest rates are set.
What are the disadvantages of a SBA 504 loan?
- Loan rates are competitive, and application and qualification procedures are complicated.
- Underwriting can be difficult and involve a lot of paperwork.
- It may take 60 to 75 days or more for a loan to be approved, to close, and to fund.